Investing in outsourcing or automating internal processes

Your employees are a key resource in your business, and it's important to manage them effectively. For this reason, you want your human resource operations to run as efficiently as possible.

You may be able to save time by hiring outside businesses to handle some or all of your HR functions, or by automating internal processes you already have in place.

There is a cost for both options, but this cost may bring about new savings.

Outsourcing

You may appreciate having an outside businesses manage your human resource administration if it allows you to:

  • Focus more on your business and customers, knowing that someone is handling some of the more routine work for you.
  • Gain access to expert guidance and assistance
  • Consolidate your expenses — one cheque per pay cycle can cover payroll, taxes, employment insurance, Canada pensions, workers' compensation and benefits
  • Reduce your administrative staff and associated expenses

There are a number of Web-based platforms that offer HR and employee benefits services, with everything from recruiting tools to talent management to payroll. Most can be customized to your requirements, and are often less expensive than hiring additional employees to handle these tasks.

What is human resources outsourcing?

When you rely on external experts or services to provide HR functions, you are outsourcing. You may choose a single source, or contract various services with individual providers.

Professional employer organizations integrate payroll administration, human resources services, benefits and related employer services into one seamless solution.

Business-process outsourcing providers either install the latest technologies or apply existing technology in a new way to improve your human resources system.

Application-service providers host and manage software applications on the Internet that are rented out to users. This spares you the bother and expense of buying software and installing it directly on your own hard drives or servers.

What services can you outsource?

Some providers offer complete packages of HR services, but others let you choose from a menu of options that include:

  • Payroll processing and administration — issuing paycheques and withholding or deducting taxes, insurance and health premiums, and pension contributions
  • Employee benefits and plans — health, dental, life and disability insurance, pensions
  • Human resources management — recruiting, selection, termination, salary reviews, job descriptions
  • Risk management — workers' compensation, dispute resolution, safety inspection, office policies and procedures, employee manuals
  • Incentive design and implementation

Is outsourcing right for your business?

The outsourcing decision depends on the size of your business, your human resource practices and the business climate.

With fewer than 100 employees, you may not have the resources for an in-house HR department; outsourcing may be a viable solution. When activities such as recruitment are required only periodically, it doesn't make sense to hire permanent experts.

If your business has at least 12 employees, a professional employer organization could be useful. With fewer than 12 employees, you may do better with online services.

Should your current HR practices differ from those of similar businesses in your industry, outsourcing may be costly because the service provider would need to adapt to your in-house process.

The flexibility of outsourcing may appeal to you if your business faces financial uncertainty, or operates in a volatile industry. You may be able to respond faster to changing resource needs by eliminating excess fixed costs.

Outsourcing: benefits and risks

Before outsourcing human resources functions, compare the potential benefits and risks. When you assess possible outcomes and results, consider your size, resources, goals and environment.

Benefits of outsourcing

  • Risk management: By outsourcing to a professional employer organization, you can hand over the legal responsibilities of managing federal and provincial employment laws. Outsourcers may also be more objective than in-house HR employees when dealing with sensitive issues.
  • Human resources focus: Outsourcing routine functions can free your HR employees to focus on strategic planning activities while retaining overall control.
  • Cost savings: Service providers are large purchasers of benefits and other packages, often receiving discounted rates that they then pass on to you. By outsourcing, you can also save on the costs of purchased software, installation and maintenance, such as upgrades, debugging, and licensing.

Risks of outsourcing

  • Impact on core functions: One drawback is a lack of personal interaction. By taking a personal interest in employee well-being, in-house HR employees may be more effective in encouraging employee retention and dealing with more sensitive workplace issues.
  • Human resources competencies: Without developing in-house HR expertise, you may remain dependent on external providers. Will you have the skills to determine your human resources needs or assess the effectiveness of an outsider? What if your business continues to grow?
  • Accountability: You end up outsourcing the final decision to hire, fire and discipline employees — it may be more difficult to motivate, reward and retain employees when lines of authority are blurred or when expectations are inconsistent.
  • Security issues: Concerns may include protected access to the data, privacy of confidential information, mix-ups among users, inconsistency in handling complaints, inflexibility when handling exceptions (requiring manual correction), and potential system crashes or malfunctions.

Choosing an outsourcing provider

  • Examine all of your HR functions in order to determine which activities could be outsourced. Then you will need the current cost of these activities to better understand and compare the value of vendor offerings.

Selection criteria

Be clear about your goals, service expectations and timelines. Can the vendor complement in-house efforts? How will you measure performance?

Before choosing a provider:

  • Check client references and any relevant certification.
  • Ask colleagues about the experience they've had with different vendors.
  • Ask vendors for a demonstration of a running application.
  • Gather information from online reference sites, including forums and discussion boards.
  • Consider hiring an IT consultant to help find an affordable application service provider.
  • Look for providers with a service orientation, a good reputation and proven expertise. Is there 24-hour technical support? Try to find someone flexible and capable of understanding your organizational culture, and who complements your human resources philosophy and management style.

The outsourcing contract

A contract defines the formal and legal elements of the outsourcing relationship, but you need not accept the vendor's standard agreement.

  • Build in your measurement and performance standards to ensure that you achieve your goals.
  • Establish clear roles and responsibilities — who does what, where, when and how?
  • Include vendor and end-user obligations.
  • State the degree of control you want to relinquish or retain.
  • Define what constitutes non-compliance and the penalties if the vendor fails to comply with the agreed-upon standards.
  • Stipulate the expectations of the reporting system between vendor and organization.
  • Discuss contract renegotiation and disengagement procedures for both parties in case of incompatibility.
  • Clearly define all terms; assumptions can lead to trouble.
  • Specify the total cost and the payment method.
  • Look for hidden costs.
  • Indicate a mutually acceptable way to review or alter the terms to address changing needs or unforeseen circumstances.

Pricing

The cost of human resources outsourcing varies, depending on the number of employees involved, the services or options selected and your geographic location. A professional employer organization typically charges a small percentage of each employee's salary per month. Online services can include an initial set-up fee plus a monthly charge per employee. Generally, the more employees included in the plan, the lower the cost per individual.

Internal processes: Costs vs. benefits

Human resources administration involves many hidden costs, such as time-consuming and distracting manual processes. By entering or updating employee data in a single database for employee human resources and payroll records, you reduce errors, eliminate duplicate records, and save both time and money.

Cost-benefits of human resources automation

You can use your intranet to shift administrative paper functions from human resources staff to managers and employees, who can maintain employee records, file expenses or claims and provide information.

You can also provide outsourced e-services via the Internet so that employees gain direct, self-serve contact with service providers.

When using either the intranet or Internet to automate human resources functions, managers and employees must ensure that their information is correct and up to date. There will be fewer copy errors because the information is entered directly into the system, rather than transferred from a paper file. Improved accuracy saves time and money.

How to compare the costs of manual vs. automated systems

  • Identify the processes to be outsourced.
  • Evaluate the paper functions and the process needed to complete the tasks. Consider all internal and external resources required.
  • Review the process and redesign it if necessary. Don't automate a poor process; technology will simply make an ineffective process more efficient. Aim for balance between process, people and technology for best results.
  • Estimate employee growth over the next few years and the extra human resources and IT staff required to support this using the current systems.
  • Investigate system options and service providers. Consider various options and combinations, including in-house intranet systems, web-based e-services, outsourcing arrangements, and possibly other in-house alternatives.
  • Evaluate the hard costs of software licensing, installation, training, maintenance, IT support, help-desk services and upgrading.
  • Estimate the savings over time. Compare the total cost of implementing and maintaining the new systems versus decreased human resources costs and improved business functions.
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